Question

Assess the possibility for the euro or yuan to become another global currency rivalling the US dollar. If the euro really becomes a global currency, what impact will it have on the US dollar and the world economy?

Answer 1

SOLUTION

IMPACT OF EURO ON U.S DOLLAR AND THE WORLD ECONOMY

When the Euro is in strong position relative to the dollar, imports from Europe costs more. American consumers see prices rise and may turn to domestic goods, boosting the revenue of American consumers. Americans who travel to Europe see their money buy less when the Euro is stronger. A single currency makes the Euro area an attractive region for third countries to do business, thus promoting trade and investment. Prudent economic management makes the Euro an attractive reserve currency for third countries, and gives the Euro area more powerful voice in the global economy.

One of the great claims made for the Euro was that it would rival the U.S dollar as a second global reserve currency. These hopes have failed to materialize. The Euro's importance in global reserves and financial markets today is about the same as it was two decades ago, when the Euro replaced the Duetsche Mark and ten other national currencies. But the hope dies last and in this spirit the European currency recently published a communication titled " Towards a stronger international role of the Euro ". The European commission, like most European policymakers, takes it as given that the Eurozone would benefit if the Euro played a more global role. But that is not necessarily true.

One such benefit supposedly derives from the widespread use of Euro banknotes outside the single currency area. On this measure at least, the Euro has been a big success. Currency in circulation has been doubled over the last 20 years, both in absolute terms and as a percentage in Eurozone GDP, and the total value of Euro banknotes in circulation amounts now to Rs. 1.2 trillion. Futhermore it is commonly estimated that a large fraction of Euro cash is used outside the Eurozone.